Major writedowns in 4th qtr and next year are inevitable

Implications: Leveraged loan will cause more losses in case CLO market seizes further. Banks as CDS counterparty will have to recognize losses when swap writer face default. Funding for loans will be much more scarce.

Analysis: In addition to the leveraged loans and the public placed CDOmarket upheaval, most of the banks also arranged privately placed single tranche synthetic CDO bespoke transactions and other esoteric transactions. The banks acted as counterparty to the CDS which are also part of such transaction. In addition the banks are also swap counterparties for regular securitization product. It is inevitable that given market value losses increasing, the swap writer will default and the banks acting as counterpary will have to make good the losses. In addition, most CDO issuers had ware- houses set up and are required to make market in the CDO tranches and equities portion of the CDO. In absence of adequate liquidity, such losses will also come to roost.